d. They want the firm to minimize risk. QUESTION 34 3 points Save Answer Three a
ID: 2781505 • Letter: D
Question
d. They want the firm to minimize risk. QUESTION 34 3 points Save Answer Three alternative machine models are being considered for an ongoing operation. The three alternatives will be used in the production of the same product. Therefore, the selection among the three will be based on total costs. Model A costs $105,000 and will last 4 years. Its real operating cost is $10 200/year Model B costs $110,000 and will last 5 years Its real operating cost is $9,400/year Model C costs $125,000 and will last 6 years, Its real operating cost is $9 600/year It isrdetermined that the real opportunity cost of capital is 7%. Rank the three models from the best choice to the least choice a Best A B C Least b Best C, B. A Least C. Best B. A. C Least e d Best A, B, C Least e e. Best A, C, B Least f, Best B, C, A LeastExplanation / Answer
This question can be solved by calculating the Equivalent annual cost of the three options since all of them have different time horizon.
Formula for Equivalent annual cost = r*PV/(1-(1+r)^-n)
For Machine 1: 0.07*105000/(1-(1.07)^-4)
= 30998.95
Total annual cost = 10200+30998.95 = 41198.95
For Machine 2: 0.07*110000/(1-(1.07)^-5)
= 26827.98
Total annual cost = 9400+26827.98 = 36227.98
For Machine 3: 0.07*125000/(1-(1.07)^-6)
= 26224.48
Total annual cost = 9600+26224.48 = 35824.48
Hence the correct option is B.
Best C, B, A Least
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